The Circulating Money Supply: Why QE3 Won’t Jumpstart the Economy—and What Would

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The Circulating Money Supply: Why QE3 Won’t Jumpstart the Economy—and What Would

By Ellen Brown

Global Research, September 21, 2012

Web of Debt

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The economy could use a good dose of “aggregate demand”—new spending money in the pockets of consumers—but QE3 won’t do it.  Neither will it trigger the dreaded hyperinflation.  In fact, it won’t do much at all.  There are better alternatives.   

The Fed’s announcement on September 13, 2012, that it was embarking on a third round of quantitative easing has brought the “sound money” crew out in force, pumping out articles with frighting titles such as “QE3 Will Unleash’ Economic Horror’ On The Human Race.”  The Fed calls QE an asset swap, swapping Fed-created dollars for other assets on the banks’ balance sheets.  But critics call it “reckless money printing” and say it will inevitably produce hyperinflation.  Too much money will be chasing too few goods, forcing prices up and the value of the dollar down.

All this hyperventilating could have been avoided by taking a closer look at how QE works.  The money created by the Fed will go straight into bank reserve accounts, and banks can’t lend their reserves.  The money just sits there, drawing a bit of interest.  The Fed’s plan is to buy mortgage-backed securities (MBS) from the banks, but according to the Washington Post, this is not expected to be of much help to homeowners either.

Why QE3 Won’t Expand the Circulating Money Supply

In its third round of QE, the Fed says it will buy $40 billion in MBS every month for an indefinite period.  To do this, it will essentially create money from nothing, paying for its purchases by crediting the reserve accounts of the banks from which it buys them.  The banks will get the dollars and the Fed will get the MBS.  But the banks’ balance sheets will remain the same, and the circulating money supply will remain the same.

When the Fed engages in QE, it takes away something on the asset side of the bank’s balance sheet (government securities or mortgage-backed securities) and replaces it with electronically-generated dollars.  These dollars are held in the banks’ reserve accounts at the Fed.  They are “excess reserves,” which cannot be spent or lent into the economy by the banks.  They can only be lent to other banks that need reserves, or used to obtain other assets (new loans, bonds, etc.).  As Australian economist Steve Keen explains:

[R]eserves are there for settlement of accounts between banks, and for the government’s interface with the private banking sector, but not for lending from.  Banks themselves may . . . swap those assets for other forms of assets that are income-yielding, but they are not able to lend from them.

This was also explained by Prof. Scott Fullwiler, when he argued a year ago for another form of QE—the minting of some trillion dollar coins by the Treasury (he called it “QE3 Treasury Style”).  He explained why the increase in reserve balances in QE is not inflationary:

Banks can’t “do” anything with all the extra reserve balances.  Loans create deposits—reserve balances don’t finance lending or add any “fuel” to the economy.  Banks don’t lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its . . . interest rate target. Widespread belief that reserve balances add “fuel” to bank lending is flawed, as I explained here over two years ago.

Since November 2008, when QE1 was first implemented, the monetary base (money created by the Fed and the government) has indeed gone up.  But the circulating money supply, M2, has not increased any faster than in the previous decade, and loans have actually gone down.

Quantitative easing has had beneficial effects on the stock market, but these have been temporary and are evidently psychological: people THINK the money supply will inflate, providing more money to invest, inflating stock prices, so investors jump in and buy.  The psychological effect eventually wears off, requiring a new round of QE to keep the game going.

That is what happened with QE1 and QE2.  They did not reduce unemployment, the alleged target; but they also did not drive up the overall price level.  The rate of price inflation has actually been lower after QE than before the program began.

Why, Then, Is the Fed Bothering to Engage in QE3?

If the Fed is doing no more than swapping bank assets, what is the point of this whole exercise?  The Fed’s professed justification is that by buying mortgage-backed securities, it will lower interest rates for homeowners and other long-term buyers.  As explained in Reuters:

Massive buying of any asset tends to push up the prices, and because of the way the bond market works, rising prices force yields [or interest rates] down. Because the Fed is buying mortgage-backed bonds, the purchases act to directly lower the cost of borrowing to buy a home. In addition, some investors, put off by the rising price of the bonds that the Fed is buying, turn to other assets, like corporate bonds – which, in turn, pushes up corporate bond prices and lowers those yields, making it cheaper for companies to borrow – and spend.

Those are the professed objectives, but politics may also play a role.  QE drives up the stock market in anticipation of an increase in the amount of money available to invest, a good political move before an election.

Commodities (oil, food and precious metals) also go up, since “hot money” floods into them.  Again, this is evidently because investors EXPECT inflation to drive commodities up, and because lowered interest rates on other investments prompt investors to look elsewhere.  There is also evidence that commodities are going up because some major market players are colluding to manipulate the price, a criminal enterprise.

The Fed does bear some responsibility for the rise in commodity prices, since it has created an expectation of inflation with QE, and it has kept interest rates low.  But the price rise has not been from flooding the economy with money.  If dollars were flooding economy, housing and wages (the largest components of the price level) would have shot up as well.  But they have remained low, and overall price increases have remained within the Fed’s 2% target range.  (See chart above.)

Some Possibilities That Might Be More Effective at Stimulating the Economy

An injection of money into the pockets of consumers would actually be good for the economy, but QE3 won’t do it.  The Fed could give production and employment a bigger boost by using its lender-of-last-resort status in more direct ways than the current version of QE.

It could make the very-low-interest loans given to banks available to state and municipal governments, or to students, or to homeowners.  It could rip up the $1.7 trillion in government securities that it already holds, lowering the national debt by that amount (as suggested a year ago by Ron Paul).  Or it could buy up a trillion dollars’ worth of securitized student debt and rip those securities up.  These moves might require some tweaking of the Federal Reserve Act, but Congress has done it before to serve the banks.

Another possibility would be the sort of “quantitative easing” first proposed by Ben Bernanke in 2002, before he was chairman of the Fed—just drop hundred dollar bills from helicopters.  (This is roughly similar to the Social Credit solution proposed by C. H. Douglas in the 1920s.)  As Martin Hutchinson observed in Money Morning:

With a U.S. population of 310 million, $31 billion per month, dropped from helicopters, would have given every American man, woman and child an extra crisp new $100 bill per month.

Yes, it would produce an extra $31 billion per month on the nominal Federal budget deficit, but the Fed would have printed the new bills, so there would have been no additional strain on the nation’s finances.

It would be much better than a new social program, because there would have been no bureaucracy involved, just bill printing and helicopter fuel.

The money would nearly all have been spent, increasing consumption by perhaps $300 billion annually, creating perhaps 3 million jobs, and reducing unemployment by almost 2%.

None of these moves would drive the economy into hyperinflation.  According to the Fed’s figures, as of July 2010, the money supply was actually $4 trillion LESS than it was in 2008.  That means that as of that date, $4 trillion more needed to be pumped into the money supply just to get the economy back to where it was before the banking crisis hit.

As the psychological boost from QE3 wears off and the “fiscal cliff” looms, perhaps Congress and the Fed will consider some of these more direct approaches to relieving the economy’s intractable doldrums.

Ellen Brown is an attorney and president of the Public Banking Institute.  In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.com, http://EllenBrown.com, and http://PublicBankingInstitute.org.

http://www.globalresearch.ca/the-money-supply-why-qe3-wont-jumpstart-the-economy-and-what-would/

The People against Wall Street: The Fed`s Quantitative Easing Violates the Rule of Law

We Need A Rally To Restore The Rule Of Law And/Or The Constitution

By David DeGraw

Global Research, November 16, 2010

AmpedStatus November 16, 2010

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The Federal Reserve represents global banking interests who have overstepped their legal authority. Their Quantitative Easing program is an explicit violation of the Constitution. By deliberately deval‎uing the dollar and causing the price of basic necessities to rise, the Federal Reserve is, as a matter of strategic policy, sacrificing a significant percentage of the US population for the benefit of a few global bankers. In the process, they are also igniting a global currency war that threatens the security of the American people. In clear terms, the Federal Reserve’s actions represent a declaration of war against the people of the United States.

Now that comedians like Glenn Beck, Jon Stewart and Stephen Colbert have demonstrated the ability to rally thousands of Americans, don’t you think it’s time to have a serious rally to restore the rule of law and the Constitution?

How much longer are we going to remain passive while global banking interests rob us of our national wealth and destroy the fabric of our society. Our nation has become a banana republic where the rule of law has become a farce and clearly doesn’t apply to one-tenth of one percent of the population. Anyone who has been paying attention realizes that an organized criminal operation has taken over the United States.

The collapse of the housing market was the result of organized criminal activity, from top to bottom. The people who committed the largest financial crime in the history of the United States were rewarded with trillions of dollars in national wealth, and continue to be rewarded as this criminal activity continues unabated.

In an attempt to drive the final nail into our coffin, five members of the Supreme Court have blatantly proven that they are beholden to these interests by ruling in favor of unlimited spending on political campaigns, which allows for a grotesque abuse of power and firmly entrenches the banking interests that have seized our nation. These banking interests have paid-off, or legally [sic] bribed, the majority of our elected officials and leaders of both parties, leaving 99% of the American population without representation.

The longer we allow them to get away with it, the more emboldened the global banking cartel is becoming. Let’s look at their latest scam…

Quantitative Fleecing: The Backdoor Bailout & Hidden Tax

On top of the many crimes already committed, their latest swindle is the Federal Reserve’s Quantitative Easing (QE2) program. QE2 is a money printing scheme that is in direct violation of the Constitution. The Constitution explicitly gives fiscal authority to Congress. The Federal Reserve, as a group of unelected global banking interests, cannot enact this policy without the direct approval of Congress. Therefore, Congress must take immediate action to stop this illegal activity, yet they remain completely silent on this usurpation of power.

As Hussman Funds president John Hussman politely put it:

“Given that fiscal authority is enumerated by the Constitution as the sole right of Congress, and spending is prohibited by the Constitution without explicit appropriation, it seems clear – regardless of how the Federal Reserve Act is written – that monetary operations involving anything but Treasury securities contain unconstitutional ‘fiscal component,’ unless they involve repurchase agreements that would make the Fed whole even if the underlying securities were to fail. It is doubtful that when Congress drafted the Federal Reserve Act to allow the use of mortgage-backed securities, it ever dreamed that the Fed would purchase these securities outright when the issuer was insolvent. Until this issue is clarified in legislation, Bernanke will continue to see it as ‘perfectly sensible’ for the Fed to make ‘money financed gifts’ that substitute his own personal discretion for those of a democracy.

Equally disturbing is that Bernanke apparently has no problem confusing fiscal policy with monetary policy when it suits him.”

The Federal Reserve tells us that they are doing this QE2 program to stimulate the economy and create jobs. Any serious economist will tell you that this is a blatant lie. We know from a basic understanding of economics and the results of QE1 that this program is completely ineffective in accomplishing their stated goals. The Federal Reserve is deliberately deval‎uing the dollar to enrich a small group of a global bankers, which will cause significant harm to the people of the United States and severe ramifications throughout the world. Their actions are igniting a global currency and trade war that is endangering the security of the United States. The Department of Homeland Security should take immediate actions to protect us against these acts of financial terrorism, and that’s not a joke.

The Federal Reserve’s actions are already causing the price of food and gas to increase and will cause hyperinflation on most basic necessities. This is happening at a time when we have a record 52 million Americans living in poverty, 42.4 million on food stamps and 77 percent of the population now living paycheck to paycheck. By deliberately deval‎uing the dollar and causing the price of necessities to rise, the Federal Reserve is, as a matter of strategic policy, sacrificing a significant percentage of the US population for the benefit of a few bankers – bankers who have already been experiencing all-time record high bonuses over the past two years. This is why we now have the highest and most severe inequality of wealth in US history. Not even the robber barons looted the economy as effectively as these banksters have.

Bill Gross, the head of the world’s largest mutual fund PIMCO, has said he expects the Fed’s QE2 program to cause a 20% decline in the value of the dollar. That may sound like an exaggeration to you, but many analysts are predicating an even more severe decline in value, and given the current global economic environment, with currency wars escalating, the very existence of the dollar is threatened like never before.

The bottom line is that this QE2 program amounts to a 20% tax increase for all Americans. They are not only taking an additional 20% of our annual salary, they are also taking 20% of all the money that we have in the bank. This is a backdoor bailout, a hidden tax, a way for working Americans to pay for the crimes of Wall Street. A way to cover the fraudulent toxic debt that they created in their casino Ponzi scheme that destroyed the economy in the first place.

This is the essence of taxation without representation.

We let them get away with the corrupted bailout. We let them get away QE1, which already stole 10% of our money last year. So now they are back at it, getting even bolder in their disregard for the American people and the Constitution.

The Federal Reserve represents global banking interests who have overstepped their legal authority and explicitly violated the Constitution. In clear terms, their actions represent a declaration of war against the people of the United States. The Federal Reserve Bank and their primary dealers are officially enemies of the state.

Make no mistake, Ben Bernanke is Public Enemy #1.

He represents the interests of the people who have brought overwhelming poverty and economic hardship to our doorstep. When are we going to hold him accountable for his actions?

All elected officials, civil servants and US military service members have swore an oath to uphold and protect the Constitution against all enemies, foreign and domestic. If Congress does not act, they will be derelict in their duties and we will have the legal authority to defend our rights. As American citizens we have a duty to protect the interests of the American people.

I am not calling for anyone to break the law. I’m demanding actions to restore the rule of law. I’m exercising my first amendment right to publicly point out that in the absence of political representation, we have an obligation to take non-violent direct action to restore the rule of law and the Constitution of the United States.

The Road Ahead…

The looting of the US economy that has occurred over the past two years is unprecedented in American history. You don’t have trillions of dollars looted from the economy and go on living business as usual. Most Americans have only a vague understanding of the collapse that we have been set up for. If you think the past two years were bad, and obviously they were, they were just a warm up to what is coming our way. After analyzing the policies in place and the current political environment, I can assure you that the next two years will be worse than the previous two.

As scary as it is to admit, I must conclude that we are only in the beginning phase of our decline. Millions more will be driven into poverty and unemployment. As this prolonged crisis continues the social safety-nets, like unemployment insurance and food stamps, the social safety-nets that have held our society together, will breakdown. Cuts to these vital social programs are going to be severe across the board. Draconian measures are just beginning to be rolled out in state after state across the country.

If you want to know where we are headed, a recent Boston Globe article by James Carroll shined a light on our dark future by revealing a well-established recent trend:

“… as federal corrections budgets increased by $19 billion, money for housing was cut by $17 billion, ‘effectively making the construction of prisons the nation’s main housing program for the poor.’ State budgets took their cues from Washington in a new but unspoken national consensus: poverty itself was criminalized. Although ‘law and order’ was taken to be a Republican mantra, this phenomenon was fully bipartisan.”

We already have more citizens in prison than any other country in the world. Our per capita incarceration rate is now on par to the darkest days of the Soviet Gulag.

What do you think is going to happen when the 52 million Americans already living in poverty can no longer afford to get the food that they need to live?

Unless there is a major shift in political policy, riots and social upheaval are coming. The mainstream media created bubble of reality that we have been all comfortably living in is about to burst. You need to prepare yourself for it.

Until we stop being so naïve and passive and realize that our country has been taken over by a financial terrorism network, until we demand that the rule of law is actually applied, our living standards will continue on the downward spiral that has only just begun.

You may think I’m be overly pessimistic or extreme, but I’m not. Open your own eyes, it doesn’t take much intelligence to see what is happening around us, it just takes some time to do the research and connect the dots. Turn off your TV set. Go online and look at what is happening throughout the world. People are taking to the streets and fighting back all over the world, and I’m not talking about in some backwoods country that you’ve never even heard of. Look at Europe, people are storming their government offices and departments of finance. They understand what is happening and they are defending their future. When will we?

Americans across the country are waking up completely broke, in debt they will never get out of and their job prospects are dire. The wrecking ball came through once and drove 50 million Americans into poverty. It is about to swing back again and take with it another 50 million of us. Our country has been attacked, looted and burnt to the ground economically.

We need to understand that we are in an all out economic world war right now, and we are being viciously attacked without forming any resistance.

The people attacking us are only one-tenth of one percent of the population. If we can recognize this fact and organize on common ground, we can win this war.

Are you ready to fight back?

I’ve made my decision. See you on the frontlines!

http://www.globalresearch.ca/the-people-against-wall-street-the-fed-s-quantitative-easing-violates-the-rule-of-law/

Collapse of the US Dollar System? Looming Financial Collapse

By Bob Chapman

Global Research, April 06, 2011

International Forecaster April 6, 2011

Region: USA

Theme: Global Economy

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As each day passes the US dollar loses prestige and its status as a world reserve currency. Washington and Wall Street pay little attention to its slide and the changes a lower dollar and loss of reserve status will bring. Once the dollar is dethroned Americans will have to learn to live on the edges of the economic and financial world. Those of you who have not read G. Edward Griffins’ “Creature from Jekyll Island” should. It tells you why the Federal Reserve was created and why the Federal Reserve was created and what its function is. It also shows you why except for Wall Street, banking and selected elitist corporations why the system was designed to self-destruct. If you read economic and financial history you will discover why such economic and financial destruction takes place repeatedly and that more often than not does not happen due to incompetence, war or error, but it is planned that way. What has happened to the dollar since Bretton Woods and the planned removal of gold backing from the dollar is an example of deliberate destruction and in that process the destruction of the greatest nation in history. In that process of 97 years the wealthy and connected have become wealthier and powerful and have become even more so. They truly expect to exit this maelstrom and war as the leaders of the future. We have news for them. The power of talk radio and the Internet stretches worldwide and the world now understands what they are up too, and they are not going to be successful in their efforts to bring about world government. The collapse of the dollar is but one aspect in the change planned in the shift in world power.

The US budget deficit is a manifestation of the decline of America, its Executive, House and Senate 95% controlled by interests from behind the scenes. The agenda is not for the American people, the constituents, who put these people in power, but for the moneyed few who totally control them via campaign contributions, lobbying and other various nefarious means. We presently are being offered up a budget cut in a $1.7 billion budget deficit. What can the people behind the scenes be thinking of unless they want the government debt structure to implode? Virtually no change in out of control spending. The deficit is accelerating not decelerating. It is obvious that these intelligent elitists and politicians know exactly what they are doing and that is destroying the financial system and the American economy. By the end of the year and perhaps sooner the deficit will be more than 100% of GDP, a role reserved for Banana Republics and there is no end in sight. No reality check, no control, no attempt to stop the deficit hemorrhage. War spending rages out of control, as we engage in another war. This is deliberate and very probable for the military and industrial complex, which could care less what the budget deficit climbs too. The nation is being ripped apart internally and there is no respite in sight. The government, municipalities, states, banking, Wall Street, the US Chamber of Commerce and transnationals all advocate more aid and spending, as the public demands more handouts. Nobody seems to understand that things cannot go on this way; austerity is going to be thrust upon us and there is going to be economic chaos. In the meantime nothing the Fed and the Treasury have done has done anything to solve the problems. Everything temporarily has been papered over with debt. The Executive Office for 11 years has never told the truth about fiscal debt or future fiscal debt. They tell the public what they want them to hear. Over and over again just more lies and propaganda.

The Federal Reserve group of 12 banks are about evenly split on QE3. Whether the front is just making things interesting will remain to be seen. We do know Mr. Bernanke could care less. He takes his orders from the elitists and does exactly as he is told, just like Mr. Greenspan did. He and others are in the process of destroying the US economy so that the US economy will be so bad that Americans will be forced to accept world government. That is really what this is all about. The Fed is destroying the monetary system, the President and Congress are burying the economy in debt and our transnational conglomerates along with this gang of criminals has made America uncompetitive and destroyed its industrial base. It is not any simpler than that. The dollar is not a financial or monetary refuge anymore. Its place as a world reserve currency has been destroyed and that mantel has again been assumed by gold. This is the result of deliberate insane monetary and fiscal policy that is destroying America.

The monetization in process is not just manifest in America. England, Europe, China and Japan and many others have done the same thing. The debt that has to be serviced, rolled and created is more than $5 trillion. In Europe alone the bailout of the sick 6 PIIGS will cost $4 trillion. If the solvent euro zone and European countries funded this debt they’d all end up bankrupt. Will the Fed be allowed to again bail out foreign central banks as they did three years ago? Probably not because the Fed now has to bail out the US government with more money and credit created out of thin air. The Fed, foreign central banks and other commercial banks cannot raise the trillions of dollars needed to keep the western world afloat.

We ask how can anyone accept QE3 when QE1 and QE2 have been such failures? Part of the result of such folly has been a weakening of the dollar and strengthening of gold and silver. We believe you will see QE3, because there is no way to stop. Inflation will roar this year and next and if we have QE3 and stimulus there is a good chance we’ll see hyperinflation. Close to zero interest rates and an endless supply of Treasury paper has driven away foreign buyers. Who wants to buy US 10-year T-notes yielding 3.5%, when inflation is 8% and climbing, especially when the dollar is moving lower? Two and a half years ago 66% of foreign central bank assets were in US dollar investments. Before that it was 70% and today it is 61.3%.

The Fed should have let the economy go into depression 3-1/2 years ago and purged the system. For whatever reasons that was not to be. Classical economics tells us malinvestment has to be removed from the system and the longer it takes to do that the worse the correction will be. Once a nation embarques on continued use of money and credit, inflation has to ensue and often that leads to hyperinflation. Not having solved the problems at hand a never-ending funding mechanism is put in motion in an attempt to buy time to fix the problem. As you can see thus far it has not worked. We are sure the Fed has added much more liquidity to the system already that they won’t admit too. This is why an outside independent forensic audit is needed to find out just what they have been up too.

Yields and currency risk are driving foreign investors out of US dollar investments and it is accelerating. Americans still do not realize you cannot survive as a first-world nation without a strong industrial base. It has been official US policy and that of Wall Street and banking to denude America of that capacity. Eighty percent of the destruction has already taken place and the only way to reverse that is by implementing tariffs on goods and services.

That brings us to the insolvency of the banking system. Does anyone really believe that putting another 1.7 million foreclosures on your books is good? That is where the lenders are headed. If they are to survive they’ll have to be quantitative easing for years to come. The deception continues, but it gets weaker with each passing day. This past week we were exposed to the vicissitudes of what the Fed spent two years trying to hide. Who were the 271 banks and others who received bailout funds to gamble, speculate with and to try to create more assets then liabilities. The funds monetized by QE1 and 2 and stimulus 1 and 2 are turning into a giant wave of inflation that will stretch over 2011 and 2012 and beyond. If QE3 and stimulus 3 become reality add another year or more to inflation to reach hyperinflation in excess of 50%.

On top of what the Fed and Treasury are engaged in you have the states, individuals and corporations to consider. Despite assurances there are going to be many insolvencies in these areas. After viewing these problems you have to say to yourself, where does this all end? As inflation grows the cost of everything increases making the situation even more difficult. Wall Street and banking tell us a recovery is underway. Unfortunately employment and housing sales and prices haven’t been informed as yet. Of course, the same gang lies about the economy and everything else. Then again, white-collar crime today is socially acceptable. Just look at the movie, “Insider Job.” Nobody cares and the SEC, CFTC and government are all working in tandem to enrich Wall Street at the expense of the public and later to enrich themselves.

There is no question the US government will have ongoing deficits of $1.3 to $2.2 trillion annually for some time to come. If this is the case there is no chance of the debt of government ever being paid. That means official deval‎uation and default, although we believe it will be done jointly by many countries.

http://www.globalresearch.ca/collapse-of-the-us-dollar-system-looming-financial-collapse/